Does Russian business deter foreign investors?

Sep 21, 2010

Anastasia Bashkatova

Nezavisimaya gazeta

A survey of representatives of Britain’s leading business media showed that Russian companies are in no rush to disclose information on the salaries and bonuses of its top executives, as well as about the structure of the business itself. These secrets deter Western investors even more than corruption.

Independent experts agree with the conclusions drawn by their Western colleagues. They cited some of the peculiarities of Russian business as being the desire to “take care of one’s own” and refusal to share with the investors information on the bonuses designated for “loyal” employees. These national characteristics of the business sector are supported by Russian legislation and corporate ethics.

In Russian business, foreign investors are most surprised by the lack of transparency in companies. Even the acute problems with corruption, theft and the high investment risk have receded into the background in the eyes of Western businessmen. These conclusions were published yesterday by analysts at PR Newswire. In August they completed a survey of more than 50 representatives of leading businesses in Britain, focusing on disclosure of information by Russian companies. The respondents rated the transparency level of Russia’s companies with three points on a five-point scale. The vast majority of respondents (74%) stated that Russian companies should follow higher information disclosure standards.

According to the survey results, Western experts — and thus investors as well — most often see a problem with the lack of transparency of business owners and the business structure, and nondisclosure of salaries and bonuses of high-ranking management. A spokesperson for PR Newswire Europe in Russia, Aleksandr Bykov, believes that the quality and the volume of information presented by Russian companies will play an important role in attracting long-term investment to the country. In the meantime, Bykov said, Russia is a step behind other developing markets in the inflow of foreign investment into the business sector.

As the main pros of investing into the Russian Federation, respondents cited the relatively low price of Russian companies, a large volume of natural resources, dynamic market development, the possibility of quick returns on investment (ROI), and unlike China and Brazil, close territorial proximity to Europe.

Most of Nezavisimaya Gazeta’s (NG) experts agree with the conclusions drawn by the Western experts. The chairman of the board at Flexinvest Bank, Marina Mishuris, said the main problem in regard to investing in Russia is the difference in demands of Russian and foreign legislation, hence the foreigners’ unfulfilled expectations in terms of disclosure. Another possible difficulty for foreign investors Mishuris cited was the different approaches to the assessment of risk when making decisions linked to national business customs.

“By Western standards, we have not yet become transparent,” said Agvan Mikaelyan, the general director of FinExpertiza. “In part, this is the result of our mentality: it is not yet a custom here to disclose salaries, and often this fact is provisioned in corporate ethics. Moreover, under Russian corporate law, the disclosure of wages is not obligatory.”

“The main problems in the relationship between Western investors and Russian companies continue to be matters of corporate management, private conflicts of interests, and the possibility to strip the companies’ assets or deliberately lower their price,” said Dmitry Krasilnikov, a member of the board of the Eurasian Development Bank.

The majority of surveyed experts also attributed the desire to “take care of one’s own,” employ a “loyal” applicant, and then pay him “special” bonuses, to the national peculiarities of Russia’s business practices. And finally, experts cite the various ways Russian businesspeople evade taxes, about which Western investors are not informed. Meanwhile, questions concerning wages and bonuses of top executives have traditionally been considered in Russia as “soft” information for optional disclosure.

“Many times, the total compensation sums of Russian executives can be many times higher than the compensation of Western specialists with a comparable knowledge level, but at the same time more efficient,” added Krasilnikov.

Some experts point to another peculiarity of Russian business: the acute necessity to protect business inside the country. It is this necessity that stands behind the lack of transparency of business structures.

“The business structure is usually disclosed to investors,” said Mikaelyan. “But it does not become public. It is protected by certain internal agreements. The nondisclosure of salaries and bonuses of our managers can be called a ‘birthmark’ of our economy, which we inherited from the 1990s.”

But Mikaelyan noted that recently steps have been made toward the disclosure of this information.

“Five to six years ago we knew nothing about the salaries of top executives of large companies, and now this information is disclosed by many companies,” Mikaelyan said.